SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
Finmeccanica
Ready to rebound
Finmeccanica has market leading positions, under-recognised
cyclical recovery upside, and potential asset disposal upside. The
stock is trading at 10 year lows on EV/Sales or on P/E relative, which
we attribute to market fears of further earnings downgrades. We
argue that the EPS downgrade cycle has in fact played out, and we
would buy ahead of Farnborough airshow and H1 results in July.
Earnings bottom
The share price underpeformance in Finmeccanica in the past 2 years has been
driven by falling earnings expectations. Consensus 2010e EPS stood at €1.48 a year
ago (Bloomberg June 30 th 2009) compared with €1.15 now. The stock has derated
in P/E terms due to market loss of confidence in the EPS outlook, and
Finmeccanica now trades on a 2010e PE of 7.7x, at the bottom of its historic range
and the bottom of our A&D coverage universe.
We believe that the company’s high visibility for the remainder of 2010 means it is
unlikely that earnings will fall below our €1.12 forecast. We believe the downgrade
cycle is over, and the stock will rerate significantly when the market recognises
this.
Recovery
In 2011 we believe that earnings will recover materially, based on groupwide cost
savings, the ramp-up of the Boeing 787 programme benefitting Aeronautics,
ongoing growth in the US part of Defence Electronics, and a recovery in some of
the cyclical businesses. In particular, we believe that demand is now bottoming in
the 30% civil portion of Helicopters.
Portfolio change
We believe Finmeccanica may be close to announcing a partner for Ansaldo
Energia (AE), probably a developing world player, as a preliminary step to a 2011
IPO. A recent report in Milano Finanza suggested that the Russian group OAO
Power Machines will take a 20% stake in AE as a first step. We believe that AE
could be worth over €1bn, and any step towards crystalising this value would be
positive for the share price.
Catalysts
The Farnborough airshow, July 19-23 rd , is the main industry event of the year, and
often serves as a catalyst for share price moves in the sector.
The following week Finmeccanica will report H1 results, July 28 th . We believe that if
the company is able to confidently reaffirm 2010 guidance then this could begin to
convince the market that the downgrades are over.
Finally, at any time during the coming months the company could reveal a partner
for the Ansaldo Energia exit strategy, which we believe would be positive for the
shares.
Valuation
In addition to P/E near its 10 year low on an absolute or relative basis, the stock is
also trading at a 10 year low on EV/Sales. Although the defence sector generally is
trading at a discount to historic levels, we believe that in the case of Finmeccanica
the extent of the discount implies further declines in earnings, which we do not
believe will happen.
Our fair value of €11.50 would apply a 2011e P/E of 9x, which is the midpoint of the
valuations of BAE Systems and Thales, which are Finmeccanica’s closest peers.
http://www.execution-noble.com
BUY
34.1% upside
Fair Value € 11.50
RIC, Bloomberg Code SIFI.MI, FNC IM
Share Price € 8.57
Market Capitalisation € 4,954m
Free Float 70%
Eur m (unless stated) 2009 2010E 2011E 2012E
Sales 18176 18119 18740 19185
Ebitda 2146 2214 2305 2352
Adj. EPS (Eur) 1.31 1.12 1.29 1.39
Dividend (Eur p/s) 0.41 0.45 0.45 0.45
FCF 489 231 733 893
EV adjustments 0.0 0.0 0.0 0.0
Net Debt 5014 5020 4547 3914
X (unless stated) 2009 2010E 2011E 2012E
EV/Sales 0.55 0.55 0.53 0.52
EV/Ebitda 4.65 4.50 4.33 4.24
PE 6.53 7.68 6.65 6.16
Dividend Yield (%) 4.78 4.78 5.25 5.25
FCF Yield (%) 4.90 2.32 7.35 8.95
Net Debt/Ebitda 2.34 2.27 1.97 1.66
Analysts
Edward Stacey
+44 20 7456 9135
edward.stacey@execution-noble.com
Rob Virdee
+44 20 7456 9222
rob.virdee@execution-noble.com
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